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Why sustainable seafood matters for investors

June 2016

Shareholders have a key role to play in spurring fisheries reform to promote growth, profits and biodiversity, says Abigail Herron.

For over three decades, the world’s marine fish stocks have come under increasing pressure from fishing, loss of habitats and pollution. Rising sea temperatures and the increasing acidity of the oceans are placing further stress on already stressed ecosystems. Illegal fishing and unreported catches undermine fisheries management, while subsidies continue to support unsustainable fishing practices. Around 85 per cent of global fish stocks are overexploited, depleted, fully exploited or in recovery from exploitation.

Governments play a vital role in regulating fishing and fish farming but the results are highly variable. Some countries have an excellent record in managing fishing. For instance, New Zealand introduced a quota management system during the 1980s that allows scientists to set the total catch while allocating portions of that total to quota holders. New Zealand is now considered a world leader in sustainable marine management.

At stake is a multi­billion dollar global industry, one of the oldest in the world. As a society, the destruction of a crucial source of food and income comes at a time when the global population is predicted to swell to 9.3 billion people. Unfortunately, few countries manage their fishing as well as New Zealand and many, particularly in emerging markets, find themselves at the opposite end of the spectrum.

Yellow card to yellow fin tuna

The European Union (EU) has given Thailand, the world’s third-largest seafood exporter, a ‘yellow card’ telling it to crack down on illegal fishing or face a trade ban on its fish imports. It is the most high-profile action taken by the EU against illegal, unreported and unregulated fishing since 2010 regulations against such practises came into force.

The Thai fishing industry is plagued with human rights abuses and fuelled by trafficked labour from neighbouring Myanmar and Cambodia. In 2014, the US State Department’s trafficking in persons report downgraded Thailand to tier three, the lowest ranking. South Korea and the Philippines though have escaped the commission’s net after bringing in legal reforms and improved control and inspection systems. Unless Thailand cleans up its fishing industry, it faces an embargo on exporting its seafood to the EU. EU vessels could also be prevented from fishing in Thai waters.

The consequences of the EU action impact food producers and retailers as well as increasing volatility in the price of fishmeal used to feed pork, poultry and farmed fish. The reputation of the Thai industry has been severely damaged. Consumer-facing brands in the US and Europe that buy Thai seafood have had to work hard to retain the confidence of customers that their products are not associated with slavery. It is not possible to assess the overall financial damage to the supply chain at this stage, but both businesses and consumers will be wary of seafood products from Thailand for some time to come. The Thai seafood industry, and its supply chain constituents, would have avoided much human suffering and significantly increased the value of the industry if it had adopted labour practices in line with international norms.

Slipping through the net

Rapid, unchecked expansion and a lack of disease control measures proved disastrous for the Chilean farmed salmon industry early in the century. The fish disease Infectious Salmon Anemia (ISA) spread quickly across the Chilean industry, in part due to large concentrations of salmon pens facilitating the transfer of disease. First gaining public attention in June 2007, the ISA crisis has cost companies billions of dollars in lost revenue due to infected stocks. Despite new farming practices and legislation, disease outbreaks and industry concerns are still rife.

Large volumes of antibiotics are used in fish farming to treat disease. Open net-cage aquaculture systems encourage antibiotic use because farmed fish are in close confinement and fully exposed to diseases and parasites that occur in the ocean. The major cause of concern with the use of antibiotics in farmed fish, and other livestock, is that many of these antibiotics are also used to treat human diseases. Frequent use of antibiotics in intensive farming industries poses a risk to human health by allowing disease microbes to become resistant to antibiotic treatments – making it more difficult to treat human disease. The World Health Organisation iscalling on agriculture to dramatically cut use of some or all antibiotics for fear of taking the world to an ‘apocalyptic’ post-antibiotic era where simple infections kill.

Anchovy shortage hits profits

Declines in Peruvian anchovy stocks led to a significant reduction in the supply of raw material for Hong Kong-based seafood group Pacific Andes’ fishmeal operations. Pacific Andes suffered substantial losses, with the company reporting that quarterly net profits were nearly 90 per cent lower in the three months to June 2015 relative to the same period in 2014. In its disclosure, the company indicated that the reduced availability of anchovy was a major factor in the losses – the company simply did not have the fish needed for processing.

Out of tuna

China Tuna Industry Group shelved a planned $100 million initial public offering in December 2014 after Greenpeace delivered a letter of complaint to the Hong Kong Stock Exchange accusing the company of underestimating its exposure to environmental and sustainability risks. The concerns that tuna quotas had been breached were shared by the regulator but not by the company or its advisors who failed to mention the endangered status of their primary catch when drafting their listing prospectus.

The widespread depletion of fish at the top of the food chain, such as tuna, shark and swordfish, and indeed any disruption in biodiversity, seldom has a positive systemic effect. The resultant population booms of prey species, such as rays and squid, and negative impact on fish further down the food chain can have wide-ranging implications.

Positive engagement

According to the World Bank’s Sunken Billions report published in 2009, improved governance of marine fisheries could capture a substantial part of the $50 billion lost annually through poor fisheries management. Through comprehensive reform, the fisheries sector could become a basis for economic growth and the creation of alternative livelihoods in many countries. At the same time, a nation’s natural capital in the form of fish stocks could be greatly increased and the negative impacts of the fisheries activity on the marine environment reduced.

Positive engagement with management can steer investee companies towards more sustainable strategies that both improve business performance and aid the environment and society. However, shareholders need to be able to ask the right questions of companies and press them for substantial answers.

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 31 May 2016. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

Issued by Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: St. Helen’s, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority and a member of the Investment Association. Contact us at Aviva Investors Global Services Limited, St. Helen’s, 1 Undershaft, London EC3P 3DQ.

In Summary

New Zealand is a world leader in sustainable marine management, while emerging markets are among those at the other end of the spectrum

Unless Thailand cleans up its fishing industry, it faces an embargo on exporting its seafood to the EU

Improved governance of marine fisheries could capture a substantial part of the $50 billion thought to be lost annually through poor fisheries management

Abigail Herron

Global Head Responsible Investment

Main responsibilities

Abigail leads responsible investment engagement across all asset classes. She compliments this work with public policy advocacy in the UK, EU and UN on a spectrum of issues from fiduciary duty to green bonds.

Experience and qualifications

Abigail previously headed up corporate governance at The Co-operative Asset Management. Prior to this, she worked for a minister of parliament and trained at the law firm Eversheds.
She is a fellow of the Institute of Chartered Secretaries and Administrators, a member of the Chartered Institute for Securities and a finance graduate of Sheffield University. She focused on the impact of a loss of pollinators on investment returns during post graduate studies at the University of Cambridge. This work was subsequently included in a book - The Business of Bees.